Advanced Ichimoku Trading Strategies
Introduction to the Ichimoku Cloud Indicator
The Ichimoku Cloud is a Japanese charting method that is used to assess different market situations. The history of this indicator dates back to 1930 when it was first published by a Japanese reporter, 'Goichi Hosoda.'
The complete name of this indicator is 'Ichimoku Kinko Hyo,' and the meaning of this explains a lot about the indicator. So let's break down the words:
- Ichimoku - Glance or One Look
- Kinko – Equilibrium
- Hyo – Chart
In short, the name of the indicator can be translated as 'one look equilibrium chart.' This essentially means with just one look, traders can identify the market trend. Most of the technical traders address this indicator as 'Ichimoku Cloud' to make it sound less complicated.
Using this indicator, users can measure the momentum of the trend. Ichimoku Cloud also provides dynamic support and resistance levels for intraday traders, while generating reliable trading signals. Let's understand more about the components and working of this indicator.
Ichimoku Kinko Hyo Components
Mainly, the Ichimoku indicator is consists of five lines. They are named as Tenkan Sen, Kijun Sen, Chikou, Senkou Span A & Senkou Span B. Each of these lines has specific calculations to them.
The 'Tenkan Sen' line is the midpoint of the last nine day's high & low. Likewise, the 'Kijun Sen' line is the midpoint of the last 26 day's high and low. Tenkan Sen line and Kijun Sen lines are known as Conversion and Baselines, respectively.
'Senkou Span A,' also known as 'Leading Span A,' is the midpoint between the Tenkan Sen and the Kijun Sen lines. 'Senkou Span B' or 'Leading Span B' is the midpoint of the 52 day's high and low. Both these lines act as the upper and lower limit of the cloud.
There is one more line known as 'Chikou Span,' and it essentially represents the current value of the asset.
You don't have to memorize anything about these lines. Just remember the location of both Tenkan Sen and Kijun Sen lines.
In this article of advanced Ichimoku trading strategies, we have used charts from TradingView and used the default color of Sky Blue and Red for Tenkan Sen and Kijun Sen, respectively.
Typically, below is how the Ichimoku cloud indicator looks on a price chart.
Exploring some Advanced Ichimoku Trading Strategies
At first, when we apply the Ichimoku Cloud on our price charts, it might look a bit complex as this indicator consists of a lot of lines. This is also the reason why most of the novice traders feel that this is a very complicated indicator to use.
But in reality, using Ichimoku Cloud is pretty straight forward and can be easily comprehended if understood correctly.
In the advanced Ichimoku Trading strategies below, let's understand the most straightforward way of using this indicator to generate substantial trading opportunities. Also, remember that these strategies do work in all the timeframes and all the types of markets.
Ichimoku Cloud is one such reliable indicators which can be used standalone to generate trading signals. So let's first understand how to trade using this indicator alone, and then let's combined it with other reliable indicators to identify signals with more accuracy.
Ichimoku Trading Strategy One: Tenkan-Kijun Crossover with Cloud Confirmation
Ichimoku cloud indicator works well on a trending market over the ranging market. So make sure to use this indicator in the trending market only. In the below chart, we can see the EUR/CAD Forex currency pair is in an uptrend. We have applied the Ichimoku Cloud indicator to this price chart.
The strategy is simple; we must look for the cloud to go below the price action. At the same time, if the Tenkan Sen Line crosses the Kijun Sen Line, it indicates a 'buy' signal.
In the below image, we can see the cloud being under the price, which indicates an uptrend. Then, in the encircled region, the crossover between the lines happened, and a buy signal is generated. Now, let's see how our trade has performed.
Entry, Stop-Loss and Take-Profit
We can enter the trade right after the crossover, but that's an aggressive entry point. If you are a conservative trader, make sure to take an entry after the appearance of a bullish candle.
We can see the market blasting to the north and printing a brand new higher high right after the trade entry.
We must plan to exit our positions as soon as the cloud goes above the price action. We have placed the stop-loss just below the cloud.
The reason for this is because the cloud itself acts as a dynamic support/resistance levels, and if the prices go below the cloud, the whole market sentiment turns otherwise.
The take-profit must be placed according to the momentum of the price. We have set the TP at the higher timeframe's resistance area. The example we showed below is from the last week, and the market didn't give any signal to close our positions yet.
Ichimoku Trading Strategy Two: Ichimoku Cloud + RSI Divergence
In this advance Ichimoku trading strategy, we have paired the Ichimoku cloud with the RSI indicator to take full advantage of the market's underlying trend. This strategy will help us in identifying potential market reversals.
Primarily, using RSI divergence, we will identify the tops and bottoms in the market, whereas the crossover of the Ichimoku cloud helps us in finding the entry point.
A Quick Introduction to RSI
RSI (Relative Strength Index) is one of the most famous oscillator indicators in the industry. This indicator consists of a line graph using which we can identify the overbought and oversold market situations.
RSI line oscillates between 70 and 30 levels; the market is considered oversold when the RSI line reaches the 30-level, and it is deemed to be overbought when the line reaches the 70-level.
The default period setting of RSI is 14 and in the below example, we have used the default setting only. If you are a novice trader or if you are using the RSI indicator for the first time, make sure to stick to the default setting. Once you gain some experience, you can tweak the settings according to your trading style.
Finding the RSI Divergence
In this strategy, the primary step is to identify the market divergence using the RSI indicator. Divergence is a phenomenon where the price action goes in one direction, but the indicator goes in another. This essentially means that our indicator does not agree with the price behavior, and the market is about to reverse its course.
In this strategy, the primary step is to identify the market divergence using the RSI indicator. Divergence is a phenomenon where the price action goes in one direction, but the indicator goes in another.
This essentially means that our indicator does not agree with the price behavior, and the market is about to reverse its course. As you can see in the below the price chart, the price action prints a divergence in the AUD/CHF Forex pair.
Entry, Stop-Loss & Take-Profit
When we have identified the divergence in an up-trending market, we must anticipate a potential downtrend. In the below chart, the encircled area is where the Tenkan Sen Line crosses the Kijun Sen Line, and that is precisely where we have entered the market.
In this advanced Ichimoku trading strategy, we have placed the stop-loss just above the entry point because divergence often provides more reliable signals. Our take-profit order is placed at the higher time-frame's major support area, as you can see below.
Ichimoku Trading Strategy Three: Ichimoku Cloud + Moving Average
The advanced Ichimoku trading strategies that we have shared above works well on all the trading timeframes. But this one is specially designed for the higher timeframe investors and traders only. In this strategy, we are using 250-period Moving Average to trade the market cycles.
If the moving average line is above the price action, it means that the trend is down. Likewise, if the moving average line is below the price action, it means that the market is an uptrend.
Check the position of the moving average line on the price chart. If the line is below the price action, wait for the Tenkan Sen Line to cross the Kijun Sen Line below the price action to go long on any given security. Conversely, if the moving average line is above the price action, wait for the Tenkan Sen Line to cut the Kijun Sen Line above the price action to go short.
Below is the Daily chart of the NZD/USD market in which we have identified a potential 'sell' trade. Let's break it for you.
When the moving average line goes below the price action, it is an indication for us to prepare for sell entry. Within a couple of days, the Tenkan Sen Line cuts the Kijun Sen Line in the encircled region, which confirms a 'sell' trade in this Forex pair.
Entry, Stop-Loss, Take-Profit
Using this advanced Ichimoku trading strategy, we took the sell entry right after the crossover of both the line on the Ichimoku indicator. Conservative traders can wait for a couple of bearish candles and then go short. We have gone for a shallow stop-loss, which is just above our entry.
Typically, the higher timeframes tend to spike very less. That's the reason why we have decided to go for a smaller stop-loss. If you are not comfortable with a stop-loss that tight, you can place it according to your trading style.
As we can see in the below chart, at the beginning of September, markets started to lose momentum. This is a clue for us to close our sell positions soon. Overall it was a 300 pip trade, and we closed our whole position at the encircled area, as the indicator obtained an opposite signal.
Ichimoku Kinko Hyo is a simple, straightforward indicator which is used to identify the market trends. This indicator helps us in capturing almost 90 percent of the market moves by following the simple rules which we explained above. The cloud acts as a dynamic support resistance levels, whereas the Tenkan Sen and Kijun Sen lines confirm the trading signals.
The indicator will notify you regularly on various price movements with respect to the Ichimoku lines when your positions are open, and the EA is an advanced trading tool which will take accurate trades on your behalf. So do not forget to check them out.
No matter how good your trading strategy is, make sure to have your risk management in place. That's the reason why we have made sure to explain the placements of stop-loss and take-profit orders in every strategy.
We hope you understood all the above mentioned advanced Ichimoku trading strategies. If you have any questions, please let us know in the comments below. All the best. Happy Trading!